By now, you might have heard about the growing outrage that bankers at banks receiving bailout money are drawing bonuses. It's reached the point where Sen. Claire McCaskill has proposed capping bankers' income at a salary equivalent to that of the president of the U.S. I didn't really have much to add about how ridiculous the arguments for paying the bankers bonuses when their firms have been nationalized (if, nothing else, most employees, who through no fault of their own, working in dying businesses are getting laid off--that is, no salary at all). But a quotes from a NY Times article that interviewed bankers about bonuses was incredible:
Of course, many Wall Street employees never expected the good times to end. They lived large, believing bonuses would always arrive, so they are ill prepared, both emotionally and financially, to cope with a sudden drop in income."Without a doubt, $18 billion is a lot of money, but it's a drop in the bucket on Wall Street," said Gustavo Dolfino, president of the WhiteRock Group, a headhunter for the banks. "These bonuses are down, and the salaries are not enough for these people. They can't live on $150 to $180,000, so they haven't saved any money. They put it on credit lines and at bonus time, they thought they'd pay it off."
After you pick your jaw up off the floor, re-read it, and then consider:
- They never expected a downturn.
- They never saved any money for a rainy day (or a monsoon).
- Even if they didn't save, they compounded the problem by not spending last year's bonus (i.e., money that they actually had), but, instead, by going into debt.
Before I get to the "They can't live on $150 to $180,000" statement [cough], isn't the list above the exact thinking that created the crisis in the first place? Maha is right: greed does make you incredibly stupid. And have no doubt, they were incredibly stupid--one might even call them fucking morons.
One more point before getting to the salary. My family has been both working poor and very comfortable. Based on that experience, I was always taught that the best thing about having money is that you don't have to worry about housing, healthcare, or education. Everything else is, by definition, a luxury. For instance, if you want to buy a luxury car, as opposed to a car that you need to get around, you should only do so if you can douse it with gasoline, light it on fire, and walk away (I'm not recommending this, mind you). The point is that it's not a necessity, but a luxury that you can do without. Which brings us to the salaries:
"They can't live on $150 to $180,000."
I've spent the last decade of my life doing research related to infectious disease. It is safe to say that career will never net me $150,000 annual salary, and certainly not double or triple that. And keep in mind, I live in Boston, so the arguments that New York is expensive don't mean a damn thing. I would love to 'squeak by' on $150,000. The fact is these guys aren't worth hundreds of thousands of dollars:
The idea seems to be that because they work very, very hard, they deserve enormous amounts of money. The thing is, normally the economy doesn't reward a person based on how hard he works. It rewards people for producing something that has value to other people. The fact is that America is full of people who work very, very hard and who are not paid well at all for it.
I can understand a financial industry executive receiving a bonus for bringing more money into the company than the other executives. But these guys seem to think they are entitled to bonuses for breathing. They argue that if they don't make so much money, New York doesn't collect as much in income taxes. However, as James Ledbetter points out in Slate, "Paying pedophiles billions of dollars in bonuses would also have ancillary economic benefits--that doesn't make it a good idea."
Like I said, that last paragraph of the Times article says so much about how we got to where we are today.
Related: Joe Nocera--"You can make a pretty convincing argument that that culture -- and the bonuses that flowed from it -- had a lot to do with creating the financial crisis."
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One of the worst symptoms of the way our economy has evolved over the last several decades is the dichotomization of society. These people live in a bubble that separates them from the majority of the population. They simply don't get it! Mr. Dolfino clearly has no fricking idea how ridiculous he sounds to anybody outside of his elite clique. I'm just afraid that most of these guys aren't going to be tasting that reality sandwich that they so deserve to be force fed.
This is pervasive not just on Wall Street, but elsewhere. I have worked in the public sector for most of my career, with the exception of five years at a large telecom. I was hired six months prior to the Worldcom debacle and afterwards, when belts were being tightened there were voices raised about how bonuses were cut and how were they to afford the new inground pool, car, etc that they bought on credit. Given that I came from a culture that never provided bonuses, anything I received went into a retirement account. Never was able to understand that mindset.
Given that my husband and I make a combined income of about $20K, that just under 20% of that goes straight into savings, and that I have yet to buy ANYTHING on credit that wasn't paid in full by the end of the month, I have to agree with Pineyman. I just don't understand the mindset. I don't understand the whole concept of buying something with money you don't have. It's like saying "I'm going to cook steak tonight. I'm sure I'll be able to buy the ingredients by next month." You can't cook if you don't have ingredients first! Why do people think that money works any differently?
Like Pineyman and Grimalkin, I was brought up to not buy stuff I couldn't afford. Which is why I have no debts other than my mortgage (and I was careful not to buy a house costing more than 3x my then annual income), and why (like Grimalkin) I always pay the full balance on my credit card every month. If I see a major expense coming, such as a significant house project (new roof last year, probably new furnace this year) or a computer replacement (my current home machine is about five years old and probably can't take the next system upgrade), I set money aside so that when the time comes I can either pay cash, or cover the full credit card bill when it's due. I am well enough off to enjoy an occasional extravagance, but before I do I ask myself whether the enjoyment I would get out of it is worth the price, and whether I would prefer some other extravagance if I can't afford both.
As I say, I live well, and I do so on less than a six figure income. So I am less than sympathetic to those who do have such incomes and are still borrowing to support their lifestyles. I'll make an exception for those who are shelling out that kind of money on uninsured medical expenses, but remember that many people with far lesser incomes are in that predicament, too.
For you Wall Streeters who are carrying a balance on the credit card, here is an investment tip. You guys make a living fighting over a few hundredths of a percent on investment returns, so why are you throwing away money on interest payments that are typically more than a full percent (much more, in many cases) every month? Pay down whatever balances you have (and don't run them up again), and the interest you don't have to pay represents that much effective return on your money, guaranteed, and tax free. Sounds like a good risk-adjusted return to me, especially in the current environment. Better yet, don't run up the balances in the first place, and you don't have this opportunity cost.
Hey, a little respect here for a theory of value that has not only history but a vast subscriber base. Not long ago, that theory was the official policy of far more people than the United States has ever had. It still has a lot of advocates all over the world.
So, please, let's just acknowledge that the finance industry subscribes to the economics of Karl Marx and move on.
I wonder if it would literally take villagers with pitchforks and torches storming their castles to make them realize how insane they sound to the rest of the world. Maha is exactly correct; our culture doesn't value work or thrift. Savers are punished. But we have to remember where the money Wall Street plays with comes from: it comes from us. It comes from our bank accounts, our 401K funds, our credit card interest and fees. If we buy or sell stocks or bonds, they get a cut. We have to stop feeding the beast. I advocate moving deposits to smaller community banks, holding cash out of the banking system (as much as you feel comfortable doing), avoiding the use of credit cards, and not trading or adding to your 401k (I means, what's that gotten you, really?).
Man, that makes me sick. I have trouble thinking what I'd do with that kind of money if I earned it. I mean I make £25k a year before tax but I still manage to save money while having a few holidays, buying far too many books, having memberships at a gym and a Muay Thai class, going to gigs, all that. These people may as well be aliens for all the resemblance their lives have to their countrymen, let alone to the average person on the planet.
I've said for a long time that there should be some kind of cap to salaries, the gap is just ridiculous. The fact that politicians earn so much is ridiculous as well. Any politician's wage should be limited to whatever the average skilled worker in his country earns - that should give them an incentive to improve everyone's lot in life as well as keeping them grounded and in touch with their employers.
As for bankers. Sorry, but f**k 'em. If you screw up your job you get punished, not rewarded. They should be facing pay cuts and layoffs across the board, any bonus is a slap in the face to every single person who's life they've helped to screw up - and that's a lot of people.
Wow, didn't realise I felt so strongly about this...
These irresponsible idiots have cost taxpayers at least $1 trillion, probably more, and thrown the world economy into what may well turn out to be the worst depression since the 1930s.
In this context, arguing over how much they should get paid is insane. Reasonable discourse - if there was any - would be confined to how many years they should spend in prison.
The relationship between bankers and bonuses is kind of like waiters and tips - it's built into their compensation structure as major source of their expected income, so their absence is definitely noticed. It's understandable why they'd borrow against it, since it's one big lump sum at the end of the year that accounts for a large % of their income. It's a different system than other industries where bonuses are often only used as a reward for exceptionally good work or when the company has particularly good year.
That said, their base salaries are quite sufficient to survive even NY costs of living; they should be expected to tighten their belts like any of the countless others who are going to end up taking significant pay cuts in this recession.
I can understand having a bonus as a standard part of your compensation just like a waiter's tips are. What I can't figure out is why, "Your mistakes made the company insolvent," is a more confusing explanation for cutting their bonuses than, "You pissed in the my food while I was trying to eat it," is for not tipping a waiter.
The whole point of variable compensation is that it's variable based on some variable that the shareholders want to maximize. I can't imagine that sophisticated financial firms don't have some sort of rationale to the tune of, "This variable goes up, bonuses go up. This variable goes down and bonuses go down. This variable completely craters and you don't get bonuses." Forgive me if I don't have any pity for people who failed to forecast bad times when (presumably) they get paid for their ability to analyze financial data.
Of course they still have a sense of entitlement and of course they still want their bonuses. Why would they suddenly become sensible now? Their reasoning powers are what led us to this economic crisis. The same reasoning is evident in the above.
It is no surprise that the collective noun for bankers is 'wunch' as in 'a wunch of bankers'
That high-rollers get bonuses has several effects, all bad for the rest of us taxpayers and 401k-contributors:
- Salary is taxed at income-tax rates, up to ~ 30% federal + state; a bonus in form of stock-options may get you the lower capital gains tax rate of 15%. That's why the billionaire's secretary typically pays a higher income tax rate than her employer. And hedge-fund managers still get almost all their income as capital gains. And the rest of us has to pay more.
- If the stock-option bonus is tied to some quarterly index/stock price/sales figures, it is an incentive to cheat and lie to 'improve' the balance sheet this quarter, when the bonus is paid, even if it makes matters worse in the future (when you might not be around to collect the bonus). Similarly, you might take on high risk now for your firm, creating a big bonus now, when you know, that the default/crash/write-off only occurs later, and when it occurs, it is after you have collected your bonus, on your successor's watch, or -at worst - you get no bonus then (unless bailed out). They knew about the risks. And they knew that the 'downside' of the risk is someone else's problem. But it is easier for them to claim that they didn't know than that they consciously looted the public/their customers/your 401k account.
And this applies to the whole 'financial industry,' not just a 'few bad apples.' It is The Madoff Economy, as Paul Krugman explains in:
http://www.nytimes.com/2008/12/19/opinion/19krugman.html
"They can't live on $150 to $180,000."
What people don't get is that this is almost literally a true statement. Prices in NYC are outrageous: a studio apartment (700 square feet) in NYC costs $400,000. A 1 bedroom (900 square feet) costs $650,000+. And a 2 bedroom costs $1.2 - 1.8 million. And these are for "normal" places in midtown (in other words, not the top notch bronze and marble buildings like Trump Tower)
To put these numbers into perspective, compare these prices to the average price of an American house (which is about $175,000). And everything here follows that pattern: a cocktail out on the town is nearly $20. What does a beer cost in middle america - $2?
The irony of it all is that without wall street bonuses, things here would be priced normally. The prices here are high simply because there's been so much cash flying around that prices have been bid up irrationally. In order to live here, you have to play ball by bidding in competition to the guy who's willing to borrow as much money as he can get his hands on, including borrowing against next year's bonus.
This is all going to come crashing down pretty quickly -- it's already started.
"What people don't get is that this is almost literally a true statement. Prices in NYC are outrageous"
So don't live in Manhattan. Queens, Brooklyn and New Jersey have plenty of affordably priced apartments and no they are not all gang neighborhoods. Couldn't have that, though, now could we?
And as you mentioned, rent and buying prices are coming down as we speak. Nobody wants those "luxury" apartments in the financial district these days - you can get 2-3 months for free to rent.
The thing is, there are people who actually like working with numbers. The problem is that the people who dominate Wall Street aren't those sort of people -- it seems like they're almost universally both psychotically hubristic and painfully innumerate. Take as an example the mortgage-backed securities market that ripped the bottom out -- not only was the basic idea (a mortgage-backed security based on risky loans made to people who were hard-sold into mortgages they couldn't afford) an obvious black hole for money, there wasn't even an upside on the other end -- in the event of foreclosures, the backside auction market had to inevitably turn into a Ponzi scheme, so the lenders who caught themselves in their own trap couldn't even recoup more than a pittance of their principle. It got even worse when developers bet on a never-ending bull run and built huge tracts of cheaply-built houses in environmentally sketchy areas -- hell, from what I've heard of some of those McMansions, you could give those things away and they'd still be overpriced.
And then you get into the derivatives market, which is based entirely on side bets that would make a Vegas bookie's brain explode and was quite adequately described by someone I've long since forgotten as "crapping into your hand and calling it income".
Now I'm no finance major, but I know enough that if I can't adequately evaluate the risk for something, it's probably not worth the effort. So where's the justification in operating on naked greed and then turning around and eliminating regulations that might have a prayer of shielding the rest of the economy from your shenanigans? After all, Mr. Gordon Gecko Jr. is probably going to wind up taking a bath with the rest of us...
"So don't live in Manhattan. Queens, Brooklyn and New Jersey have plenty of affordably priced apartments and no they are not all gang neighborhoods. Couldn't have that, though, now could we?"
Prices are equally outrageous in those places -- Long Island City, Astoria, Brooklyn Heights, etc. are all very expensive compared to housing in the rest of the country.
The only places that are inexpensive are inexpensive for good reasons -- crime, bad schools, poor access to public transportation, extremely long commuting times, etc.
About the price of housing, those prices are comparable (or slightly lower) equivalent neighborhoods in Boston. You can get by on $150-180,000/yr easily; I live in Back Bay on far less.
One of those things you learn in graduate school, I suppose...
TF,
Not all the bankers at the company screwed up, just the ones involved with the MBS mess. If you were a commodities specialist, you may have actually had a pretty good year in terms of your performance but got your bonus annihilated by the mistakes of people in an entirely different division of the company.
Which is pretty much how the real world works. My bonus formula is based on a combination of personal performance and the company's ability to make its numbers. The problem is one of living in a world of infinite upside and zero downside. They'll just need to become accustomed to the world the rest of us live in.
Anecdotally, most of the high finance people I know are not particularly sympathetic to the plight of people whose companies are not doing well. At least, they're not sympathetic enough to support sending government money their way. Suddenly, their contempt for a safety net isn't so strong. Their understanding of when it should kick in doesn't seem to be, either.
People "living it up" on welfare are beneath contempt, but their own inability to pay the rent on 6+ figures isn't their fault at all.
@Mike the Mad Biologist,
When you say you're "getting by", what does that mean? There are people living in trailer parks "getting by" on almost nothing, so it's all relative.
Anyway, your numbers don't add up. There's no way to reasonably afford a $1.2 - $1.8 million dollar 2-Bedroom apartment on only 150-180k a year. Let's crunch some numbers and take a look: to be conservative, let's say the apartment costs *only* 1.2 million. 25% down (what Co-Op boards require in NYC) leaves you with a %900,000 mortgage. At 5.25%, that's a mortgage payment of about $5500/month (not counting any maintenance charges that are mandated by the Co-Op building to cover taxes, repairs, heating fuel, etc -- and here in NYC, my mortgage is only 2/3rds of my monthly payment -- the other third is maintenance).
After taxes, on 180k/year your take home here would be 99k. $5500/month = 66,000, or two thirds of your income, and that's before any maintenance charges. It's not doable.
But let's say you're squeezing into a 1 Bedroom with your spouse and/or children, costing you a "mere" $600k, that's a $400k mortgage with a monthly payment of only $2400/month (once again, not counting any maintenance, which would reasonably be somewhere between 900-1400/month here in NYC for a 1-Bedroom apartment).
But if you're in NY, what else do you have to pay for? Thing's here are expensive! Here are some examples:
Are you paying for daycare (it costs $2200/month in Midtown manhattan)? Are you paying for a child's school (it costs $18,000 a year for *preschool* in NYC; and since that's not the entire day, you need daycare also -- not to mention classes and other activities to keep the kids occupied when school is not in session)? Are you fully funding your retirement in addition to paying the mortgage?
And I will point one more thing out -- the suburbs are not any cheaper. You simply get more space for the same price (which means higher expenses for heat, A/C, repairs, property taxes), you lose 2 hours a day or more commuting, and you have to pay commuting expenses, tolls, etc.
The entire NY metro economy needs to be repriced, not just wall street. Boston is expensive too, but not as expensive as NY (I recently visited Boston).
As somebody who lives in the SF area, which experienced a similar (but not as extreme as NY) cost of living run-up, that's life. My wife and I make good money and we rent, largely because of the insane housing bubble.
Renting your home doesn't kill you. Lots of people who are a lot poorer than they are live in New York. The median household income in NYC is around $50K if Wikipedia is to be believed. That says to me that. If you can't "get by" with 3x the median household income, your priorities are not in order or your definition of "getting by" is not in line with that of your neighbors.
Yeah, if you want to live in public housing projects, you can afford to do it on 150k/year. Is that your point?
Just to follow up on what TF said, most of the housing expenses cited by Thisson are ownership expenses, but renting a two bedroom apartment is affordable, and quite feasible. At some point, and Boston, NYC, and SF have all hit those points, home ownership (as opposed to renting) isn't the best option.
Do you seriously think that the *median* household in NYC is living in public hosing projects, much less somebody making 3x that amount (on a single income--not counting a spouse)? New headlines: Half of all New Yorkers are living in government-sponsored squalor!
This all reeks of the lack of perspective these people have. Not being able to *buy* a nice place in the nicest part of New York City is equivalent to squeaking by in the projects. "Waaaah! I'm not as rich as I used to be!" Join the club.
Hey, a little respect here for a theory of value that has not only history but a vast subscriber base. Not long ago, that theory was the official policy of far more people than the United States has ever had. It still has a lot of advocates all over the world.
So, please, let's just acknowledge that the finance industry subscribes to the economics of Karl Marx and move on.
Now I'm no finance major, but I know enough that if I can't adequately evaluate the risk for something, it's probably not worth the effort. So where's the justification in operating on naked greed and then turning around and eliminating regulations that might have a prayer of shielding the rest of the economy from your shenanigans? After all, Mr. Gordon Gecko Jr. is probably going to wind up taking a bath with the rest of us...